This is why people hate bankers
There was speculation on Thursday over whether Mr Horta-Osório should be entitled to his full annual bonus for 2011 of potentially more than £2m as a result of his absence
Well yes, if you come in, set a load of unrealistic targets, sack half the top management, fail to recruit replacements, abandon the targets and then take two months off on sick leave with insomnia, then I suppose that is the sort of thing that might go a bit badly at bonio time.
I think that maybe as much as 18% of the banker-rage is to do with the simple word "bonus". If it was called what it is - a commission on revenues - then people would understand a lot more that investment bankers are for the most part basically commission salesmen, that commission salesmen often make a hell of a lot of money, and that if you don't pay commission to your sales force, then soon you don't have a sales force. But linguistically, everyone knows that a "bonus" is an extra special reward for a particularly ace job, and thus they get a bit pissed off when someone standing in a pile of wreckage where a financial system used to be might be asking for one.
It is true about the sleep thing though. An awful lot of what determines success or failure in this industry (and, in my opinion, a lot of the backstory behind commenters on the Guardian banking blog who have a version of history where they left banking because they were just so damn ethical) is how well you handle lack of sleep.
Did you notice Win Bischoff's very odd remark in which he repeatedly denied that yer man was affected by "stress"? Working Sundays and not sleeping until you crack up = ok. "Stress", however, would be psychiatric and therefore, gay.
ReplyDeleteWell, back in the day when the banker haters were outnumbered by the suckups, the argument for enormous banker pay is that they performed the critical task of properly assigning massive amounts of capital, and so produced massive amounts of wealth. Which was fine during the bubble, and and something like ten years of capital production vanished into thin air, but the commissions were still with the bankers. And then they got more commissions.
ReplyDeleteThat argument was indeed made by the Economist magazine and various business school types. But a minute's thought shows it's bollocks. The whole point of Hayek is that it's the market that does the allocating, not the individuals trading in it. Capital allocation is meant to be an emergent phenomenon. The traders (clue is in the name, they're not "capital allocators") did their job in providing market liquidity for long-dated capital assets - well done thou good and faithful servant.
ReplyDeleteIf it was called what it is - a commission on revenues
ReplyDeleteIn many cases, I'm sure it is, but perhaps not this one. "Mr Horta-Osorio is contractually entitled to a commission on revenues of 225% of his annual salary"?
Before this all happened my guillotine list included about 75-80% of all politicians and political operatives, in either party (American parties, since I'm ethnocentric), a higher proportion of the political media including the think tanks, and undetermined but moderately high proportion of the economics profession, and an unknown but moderately high proportion of the high level people in business and finance. There were a lot of John Does on the list since I'm just a moderately well informed suffering citizen and don't have an inside knowledge about who did what, and I'm inclined to let God sort them out.
ReplyDeleteGenerally, very powerful people (the establishment, oppressors, etc.) hold information very close so it's not easy to tell who did what. A reason to let God sort them out.
I have ignorantly felt all along that a lot of businesses were suffering from management looting, i.e., John Does setting their own high salaries while managing the business they managed declined and their employees, stockholders, and the general public suffered the consequences. I have included finance.
Since I have never really felt that the market is as perfect as it is claimed to be, even if their salaries were set by the market, which I somewhat doubt (agent / principal, self-dealing etc.), it wouldn't change my opinion.
I have always doubted the theory, wherever it perches, that there's no agency whatsoever, including no social agency, and that everything is done by forces and tendencies. Thus I feel that during this whole 30 years of capitalist euphoria with the attendant political catastrophes, quite a few John Does had reason to know that something was wrong but failed to exit the crime scene, and others actually did optional things that they either knew were wrong, or which they didn't think were wrong because they were Ayn Rand sociopaths, but should have.
So now the question for me becomes: are you saying that there should be no guillotine list at all, because shit just happens and no one should ever be "blamed"? Or that there should be a list, but that no bankers should be on it? Or that there should be a list, and some but not most bankers should be on it?
NOTE: My bloody-mindedness is, of course, all hot air. I never expect me and mine ever to have any influence over policy anywhere. What I expect to do during my remaining years is watch several members of my family struggle in a newly-degraded economic world more tightly ion the grip of the John Does of finance than it was before.
Evariste Galois: "On the following Bastille Day, Galois was at the head of a protest, wearing the uniform of the disbanded artillery, and came heavily armed with several pistols, a rifle, and a dagger. "
ReplyDeleteDelete previous comment. Windows is fucking with me.
ReplyDeleteIf the banker bonus is more or less a straight commission, then why all the fuss and ceremony with the envelope at the end of the year?
ReplyDeleteI suppose what I'm asking is if the people giving and getting it are going to pretend it's not a commission, well then why should the hoi polloi pretend otherwise?
(I feel Galois's thing with guns was not healthy, and history proves me correct.)
ReplyDeleteJohn, Phil: yes, this guy is "management"; I diskard him.
ReplyDeleteRS: basically because it's a team sport, and there are always so many people involved in any single bit of revenue that it's the work of the devil to attribute it to any one of them (this obviously involves a lot of politics,ass-kissing and ratlike behaviour, which is why I'm nota millionaire yet)
In actual team sports, of course, athlete bonuses are contractually determined, in advance, based on fixed targets of team and/or individual performance.
ReplyDeleteI can see now that athletes are simply getting paid a commission on ticket and advertising sales. But there seems to be not nearly as much pomp and dagger in the payouts as we find in the financial sector, for some reason.
You banksters love a big spreadsheet; would you not find it thrilling to devise an elaborate contractual commissions-percentages scheme to be signed at the beginning of the year, so as to have something to show the rubes at the end of the year (or month) when the checks are cut?
On further reflection, this:
ReplyDelete"there are always so many people involved in any single bit of revenue that it's the work of the devil to attribute it to any one of them"
Can be rephrased as:
"Financial firms' internal accounting is woefully lacking for ability and/or interest"
Which is hilarious.
I suspect the reason you're not paid your commission in the same way as sales teams elsewhere is that unlike elsewhere, there is an element of dumb luck in the profit realized from selling a parcel of money, and to make the commissions more or less fair at the end of the day, the estimate of the size of that element would have to be somewhat higher than many financial whizzes would find comfortable.
But there seems to be not nearly as much pomp and dagger in the payouts as we find in the financial sector, for some reason.
ReplyDeleteI really would love it if CNBC were to do a bonus season wrapup as ludicrously overhyped as Sky Sports "Transfer Window Sunday".
I suspect the reason you're not paid your commission in the same way as sales teams elsewhere is that unlike elsewhere, there is an element of dumb luck in the profit realized from selling a parcel of money, and to make the commissions more or less fair at the end of the day, the estimate of the size of that element would have to be somewhat higher than many financial whizzes would find comfortable.
ReplyDeletethere is an element of that, but the real problem is in getting people to give each other credit. If I have an idea for a trade, and Jim's client gives Bob an order in the stock, then generally you will find me, Jim and Bob all claiming 100% of the revenue attribution.
I think you're rather overstating the attribution problem, unless internal accounting really is unbelievably neglected.
ReplyDeleteYou are part of the department or group that generates trade ideas. Jim has a client list. Bob's orders aren't anonymous. A single trade's profits don't have to be divvied up; you can pool deals, or a percentage of deals, and have different rules for different kinds and sizes of deals, and do all manner of clever things.
Do you not see how you might look less than entirely credible when you play up the difficulty of concocting complex schemes for allocating funds?
Yes, it's only human that everyone will want full credit for every profit, and run like hell from every loss, and your own success will naturally be due to skill, your own failure to bad luck, but vice versa for your rivals or even colleagues.
And that is all the more reason to hash out a plan in advance for the disbursement of these more-or-less-commissions, no?
If I'm not mistaken, your finance fan media do get rather breathless when a star player is traded.
ReplyDeleteI'm sure if a man saying numbers into a telephone looked even half as nice on television as one putting a ball into a net, your uniform would be festooned with logos, too.
there is an element of dumb luck in the profit realized from selling a parcel of money
ReplyDeleteThere is an element of dumb luck in the profit realised from selling anything. Anyone who has ever had a sales job or anything to do with a sales force has learned this the hard way.
The very proliferation of bullshit sales methodologies, training courses, incentive schemes, motivational speakers, etc, shows this, in the same way that the proliferation of infallible systems for winning on the horses, playing the stock market, etc shows that a hell of a lot of dumb luck is involved.
Similarly, if selling wasn't largely luck, bribing your customers (through zero-rate vendor financing, profitability-destroying discounts, hookers'n'coke entertainment, or downright kickbacks in raw cash as at sobersided old Siemens' telecoms division) wouldn't be as common as it is.
If you've ever had to sell anything for a living, you'll know that you have shit weeks and you have golden weeks and there is no way of knowing until the books close on Friday. Sometimes you'll be Lucky Lucky Star from the Merc ad and sometimes you'll be Willy Loman. People who stick with it as a career get into all the Sales Dogs bollocks to manage the horrible nature of this realisation.
Alex:
ReplyDeleteI was thinking of dumb luck after the handshake.
Which is a bit more a concern when selling money than when selling other sorts of things typically sold on commission.
Nice rant, though.
unless internal accounting really is unbelievably neglected
ReplyDeletethey try, oh how they try (I've just been to a four hour meeting on the new performance assessment system)... but it never works.
Clients are regretfully reluctant to order their affairs to suit our internal accounting systems, so they will give an order in one stock in gratitude for an idea in another, they will punish the salesmen for screwups by the traders, they will say that they are paying you via their algorithmic trading order flow ... and that's when the bastards aren't just simply sticking you with a ten million sell order at the touch in a tanking market or similar hospital-pass. Things are even more screwed up on the fixed income side of the fence where there is no commission charged and so the attribution between sales and trading isn't even possible in principle.
There is a lot that can be done to quantify individual revenue contributions (particularly when you have a few nice clients who actually tell you what parts of the service they're prepared to pay for), but it works better if everyone just trusts each other and works for the team. In general, a high proportion of formula-driven compensation is a reliable sign of a second-tier firm where nobody trusts the management.
(partial exception: there are some firms that still have old fashioned "half-commission men" and that can work quite well as long as they aren't dealing with complicated clients).
OK, so what happens when the business as a whole has lost money? Somehow that still seems to translate into bonuses, and I think this is one of the things that drives anger. People are generally willing to accept that there's an argument for performance related pay, but bonuses for failure while cash is being fed into the other end of the business by the taxpayer that make people really angry.
ReplyDeleteIf individual success can't be attributed, what about individual failure or error?
I think you're missing the bigger picture here, and its perhaps understandable given you're the focus of much of the rage.
ReplyDeleteThe thing about bankers is that over the past 30 years they've more and more been running things and become very wealthy. This is particularly true in the US, but true elsewhere also. This during a period where the average person didn't do particularly well. Then at the end of a massive economic crisis, in which they had to be bailed out, they're still running things and lecturing everyone else. This is not how you win friends and influence people.
And, in the US particularly, they fucked us over. There has been massive fraud, which the authorities have both enabled and covered up. This is the kind of thing, that when it emerges, makes you unpopular. Add to that the abuses of the reposessions scandals, and the complete unreasonableness of the "banks" over this. Then factor in the tone-deaf comments repeatedly made by those banking elites. This is not surprising. Its class-warfare in its latest guise.
Class warfare is rarely subtle, or nuanced. It kind of feels like the last card remaining though.
But Daniel, why do we have to quantify individual revenue, in a firm where everyone is a Team Player?
ReplyDeleteIf everyone on the team trusts each other and works in congress, then surely we can (monthly?) divide the spoils according to a predetermined share, per employee? And then maybe (annually?) add on a relatively small reward for exceptional performance?
This worked quite well in the golden age of sail, for ships of morally various purpose; why do we do things differently today? Why is your "commission" determined by a manager twirling a cigar some early day in December, rather than by your pre-allocated percentage of ship's revenues, plus or minus a gold dagger or two?
And again, these questions are meant to be considered from the "how the public sees us" perspective, more than the "well this is just how we do things in here" viewpoint.
Cian, on your first I think you're still in the state of conflating bankers with neoliberals. Bankers are young and arrogant and live in big media markets, but they're actually only about 15% of the 1%. The reason that they became so prominent over the last 30 years is that bankers provide a service - liquidity - which is very valuable to a class of people who were about to set out on some plundering. The real villains of the piece were the CEOs of companies of all sorts, particularly in the technology industry. The whole process kicked off with NAFTA, which was a present from Bill Clinton to manufacturers.
ReplyDeleteOn the second point, as I suggested in comments on a previous post, the argument "we are not listening to you because other people quite like you did really awful things" is not necessarily fallacious, but I really don't expect to hear it from socialists. Looking at the bigger picture here is actually potentially quite misleading.
To be honest, the whole repossessions issue is a perfect example of why banker-rage is counterproductive. It's of course tied up with the American liberal assumption of the last fifty years that anything worth achieving is worth achieving with a lawsuit.
It would be massively more productive for everyone, including the bankers, if American banks were to take a more sensible and conciliatory attitude to mortgage loan modifications and foreclosures. But how can they do this when they're being sued in nine directions over technicalities of the title system? In an adversarial system, filing a load of suits that effectively assert that the mortgage lenders have no legal status at all is more or less bound to make them assert a contrary position of a massively maximalist view of their legal rights.
RS: basically because the purpose of the bonus/commission system isn't to divide up the spoils fairly and it certainly isn't to give people a reward for being great guys - it's to incentivise. The system is a muddled compromise between the need to have a sufficiently direct connection between individual effort and individual reward to get people working the long days and making hundreds of phone calls, and the need to avoid incentivising pathological behaviour. And, of course, the need to recognise that you're operating in a quite fluid labour market.
ReplyDeleteIt's not a perfect system and not a lot of thought has gone into it at all - hence the "bonus" word which I think is profoundly misleading - but it's evolved over a long time in response to a very tricky principal/agent problem.
Wait, now I'm confused.
ReplyDeleteI thought we were talking about rewarding employees who were "basically commissions salesmen," and that in a well-run firm everyone "works for the team."
But apparently, at the end of the year, you're not working for the team at all, are you, you're just expected to pull in as much cash as possible without any immediate suspicion of "pathological behavior?"
What I'm getting at, of course, is that the public might not be entirely wrong to look at a rewards system that explicitly rejects any quantitative basis and then say "well, I'm not sure I can get behind that one hundred percent."
It doesn't reject any quantiative basis - there is always going to be some unit size of "team" for which the bonus pool is basically a fixed proportion of the revenue. This could be a unit size of 1000 people or an individual, but most usually, it's at the office level - about a hundred people.
ReplyDeleteThen the politics and drama gets up about how you divvy up the pool. Nearly every place that does commission sales and has a business model more complicated than advertising telesales will have a similar problem to solve. Lawyers get paid based on their billings, but they don't get a set percentage of their billings.
Dan, I'll respond to the main bit when I get a chance. However I just wanted to respond to this, as you are completely wrong on it, and it might help explain why there is so much anger towards bankers in the US:
ReplyDeleteIt would be massively more productive for everyone, including the bankers, if American banks were to take a more sensible and conciliatory attitude to mortgage loan modifications and foreclosures. But how can they do this when they're being sued in nine directions over technicalities of the title system? In an adversarial system, filing a load of suits that effectively assert that the mortgage lenders have no legal status at all is more or less bound to make them assert a contrary position of a massively maximalist view of their legal rights.
These law suits came longer after all attempts at modifications had failed. These included two programs initiated by the Obama administration, where the banks promised that they would modify loans where appropriate. They didn't, virtually none happened - even though there was plenty of evidence that plenty of people were wrongly rejected under the guidelines of the program. There are various reasons for this, which I will get to. The disinterest of banks, and indeed the shoddy way they treated applicants, has been well documented.
A law suit on the title system is a tatic being used in the defence against foreclosure. That is, after all attempts at negotiation have broken down. It is a delaying tactic, and a last ditch defense - one which is used (sometimes successfully) to force banks back to the negotiating table.
The wider law suits have arisen from the fact that the banks are acting illegally in many of these suits. This includes forging documents of ownership, and lying repeatedly and blatantly in foreclosure cases. It is so bad that even politicians who'd really rather look the other way are facing massive pressure to do something about it.
People have been foreclosed on, even though they were paying their mortgage. People have been foreclosed on, even though they thought they had a deal with their bank, or genuinely did have a deal (but in the mean time the mortgage has been passed on...). In many instances (how common I don't know - but common enough for this to be a staple of local, rather than national, news) people have been foreclosed upon despite not having a current mortgage and never having had a mortgage with the foreclosing bank. Now sure you can sort that one out, given time and a lawyer (so good luck if your poor and black) - but the fact it happens at all, and regularly, indicates the level of incompetence that people are dealing with. It also indicates how messed up the title process really is.
Finally, you've got the incentives screwed up here. The people (including the banks) who are foreclosing, do not own the mortgages. They are merely the servicers. This means that they make more money by foreclosing, than they do in negotiating a settlement. Now granted the same bank probably owns a whole lot of other mortgage debt, but that will be serviced by somebody else.
filing a load of suits that effectively assert that the mortgage lenders have no legal status at all is more or less bound to make them assert a contrary position of a massively maximalist view of their legal rights.
Here's the thing, Daniel. They probably don't have any legal status in many cases. In many cases its not actually clear who, if anyone, does own it. There have been cases thrown out because there was no paperwork proving that the claimant had any rights.
The mess in part exists because the banks decided to cut corners and ignore the perfectly servicable legal system. And yet banks have refused at every stage to behave reasonably. Now if they had, its quite probably the title deeds would have been less of an issue.
The people (including the banks) who are foreclosing, do not own the mortgages. They are merely the servicers. This means that they make more money by foreclosing, than they do in negotiating a settlement.
ReplyDeleteAnd the people who are doing the actual kicking people out of houses are not the services, but mere contractors. And our host has actually noted this previously, in his nice-economy-you've-got-here post, in saying that British mortgage lenders and servicers have apparently not yet outsourced the crowbar shit at a third remove.
On the other hand: you can argue that the county-based system of deeding and titling and smudgy thumbprints in india ink is ridiculously archaic from the perspective of yer modern electronique banqueur, but you can't pretend that it doesn't exist, and it's not that stretchy a stretch to say that MERS was trying to pretend so, and that district judges in state courts are well within their remit to say as much.
You can also argue that when house prices were bubbling like a bubbly thing, there was a collective looking the other way w/r/t the pretense that is MERS, but again, if any industry should have a historical understanding that its role has been to enable shonky shit when it seemed like a good idea, and take the shit when it turns out to be otherwise, it's banking -- and that goes back to the days when Jewish lenders to the godly and cash-strapped nobles of Christendom gambled on whether they would be the generation to get expelled.
Now, clearly, there is a certain segment of the population who would quite like to see "the bankers" en masse receive the equivalent of the mediaeval treatment of "the Jews" -- and I'm more than aware of how delicate an argument this is -- but conversely, I think it's a stretch for banks and those arguing their case to imply that they're in a similar position to mediaeval Jewish lenders.
In this specific case -- i.e. arguing that their hands are forced regarding a shadow-title system that they set up at a distance from black-letter law -- it feels like very special pleading indeed.
The thing is that at least the medieval Jewish money lenders knew that there was a church prohibition on usury. The banks really weren't ever told that MERS was a Very Bad Thing that they were doing, and indeed involved Massive Fraud For Which I Can't Believe Nobody Has Gone To Jail. It was entirely the direction of public policy that mortgage titles should be dematerialised, Fanne and Freddie required that you did it, etc.
ReplyDeleteThe banks really weren't ever told that MERS was a Very Bad Thing that they were doing
ReplyDeleteAt least some banks were warned by their lawyers (I'd guess all - but not paying close enough attention). They seemed to have assumed it would never be a problem, or it would be somebody elses problem.
Okay, if you can point me to something on Freddie Mac/Fannie Mae's involvement, that might change might mind somewhat. I hadn't heard that, and I'd like to know more, if its true.
Public policy would be an actual law being passed, rather than something involving the public/private mess that was Fannie Mae/Freddie Mac. If you're going to argue that the poor little banks were unable to get such a law passed, I will laugh hollowly.
I'll also point out that if any ever the maxim "ignorance of the law is no defence" should apply, its to lawyered up banks. I mean seriously? This seems to be veering into a widows and orphans defence.
Or are you arguing that banks are the victims of the dismantling of regulations? Which I suppose is true in a sense, but would be a seriously weird argument in other senses...
Public policy would be an actual law being passed
ReplyDeleteNot in the USA. It's an amazingly Balkanised system of property titles. So it would involve passing literally thousands of local ordinances. There is actually an entire industry (title insurance) that has no economic role whatever other than to give people peace of mind over the monumentally fucked up US title system. And of course, that industry would fight like tigers at every stage. The investment banks can swing a lot of lobbying in Washington and New York, but they can't do everything.
Fannie and Freddie were founding members of the MERS entity. Quite logically so as they are massive issuers of mortgage backed securities and so have more interest than literally anybody else in doing something about the US title scandal.
Back in the 1990s, some country recorders (and the title insurance industry) tried to get Congress to pass a specific law against the founding of MERS. But Congress refused, partly because it was the deregulatory 1990s, and partly because MERS was, in principle, a great idea.
In practice, of course, not so much. But part of the reason it was so poorly and sloppily organised is that it was never regulated at all, and part of the reason why it was never regulated at all is that Congress never wanted to touch the subject because there was a quite powerful coalition of interests (particularly the title insurers who were acting in ludicrously bad faith) who would jump onto any such debate to try and rule it out altogether. It's another example of a corner that got cut because there was a massive current account imbalance to intermediate, and this was one thing standing in the way of intermediating it. If it hadn't been this, it would have been something else, and if it hadn't been something else, then the USA would have had to live with the GDP consequences of twenty years of stagnant real wages.
It is quite amazing that the US doesn't actually have a land registry. Possibly even weirder than chancel-repair liability.
ReplyDelete